First Trust AlphaDEX TM European Dividend Index ETF (CAD-Hedged) Interim Management Report of Fund Performance June 30, 2014

Transcription

1 First Trust AlphaDEX TM European Dividend Index ETF (CAD-Hedged) Interim June 30, 2014

2 INTERIM MANAGEMENT REPORT OF FUND PERFORMANCE June 30, 2014 First Trust AlphaDEX TM European Dividend Index ETF (CAD-Hedged) (the First Trust ETF ) This interim management report of fund performance contains financial highlights, but does not contain the complete unaudited interim financial report of the First Trust ETF. All references to dollars contained herein are to Canadian dollars. Securityholders may also contact us to request a copy of the First Trust ETF s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosures relating to the First Trust ETF by calling , by writing to us at FT Portfolios Canada Co., 330 Bay Street, Suite 1300, Toronto, Ontario M5H 2S8 or by visiting our web site at or SEDAR at Forward Looking Statements This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent beliefs regarding future events. By their nature, forward-looking statements are based on assumptions and are subject to inherent risks and uncertainties. There is significant risk that forward-looking statements will not prove to be accurate. Readers of this document should not place undue reliance on forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the expectations, estimates or intentions expressed or implied in the forward-looking statements. These factors include but are not limited to market and general economic conditions, interest rates, foreign currency exchange rates, the extent of industry sector exposure, the performance of the securities of the issuers held in the portfolio and regulatory developments and the risks detailed in the First Trust ETF s prospectus. The Manager does not undertake and specifically disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. (i)

3 Investment Objective and Strategy The fundamental investment objective of First Trust AlphaDEX European Dividend Index ETF (CAD-Hedged) (the First Trust ETF ) is to replicate, to the extent possible, the performance of the AlphaDEX European Dividend Index, net of expenses. The investment strategy of the First Trust ETF is to invest in and hold the Constituent Securities of the AlphaDEX European Dividend Index in the same proportion as they are reflected in the AlphaDEX European Dividend Index or securities intended to replicate the performance of the AlphaDEX European Dividend Index. The AlphaDEX European Dividend Index results from applying the AlphaDEX methodology to a universe of ADRs of European companies that are listed on the NYSE, NYSE Market and NASDAQ exchanges. The First Trust ETF will generally seek to hedge substantially all of its U.S. dollar, British pounds sterling, euros and Swiss francs currency exposure associated with its portfolio investments back to the Canadian dollar. The Manager may change the AlphaDEX European Dividend Index to a currency hedged version of the index to provide investors with substantially the same exposure to the asset class to which the First Trust ETF is currently exposed. If the Manager changes the AlphaDEX European Dividend Index, or any index replacing such index, the Manager will issue a press release identifying the new index, describing its constituent securities and specifying the reasons for the change in the index. There are two classes of units offered by the First Trust ETF: Common Class (TSX symbol: EUR) Advisor Class (TSX symbol: EUR.A) The inception date of the First Trust ETF was February 4, Risk The portfolio held 42 equity securities as at June 30, The top ten equity holdings accounted for 41.05% of the portfolio. Financials, Energy, and Health Care were the top three sector weightings at the beginning of the reporting period. At the end of the period, Energy, Health Care, and Telecommunication Services were the top three sector weightings. The sector weighting changes were a result of the AlphaDEX stock selection process, and not a material change in benchmark composition. The AlphaDEX stock selection process is a rules-based process and can result in sector weightings that differ from that of Bank of New York Mellon Europe ADR Index (the benchmark ). The First Trust ETF invests in stocks that pay dividends. The ability of the company to pay a dividend in the future is dependent of factors that are not controlled by fund management. A company held in the fund may, at any time, decide to cut or eliminate its dividend payment. The First Trust ETF added 6 stocks and removed 12 stocks at the beginning of June to reflect changes that occurred in the underlying index at its semi-annual rebalance. The index made changes by applying the AlphaDEX selection methodology to a universe of European dividend paying stocks. The decrease in holdings was a result of the reduction in the number of eligible stocks in the starting universe. At the end of the period, Telecommunication Services, Energy, and Health Care holdings were the most overweight sectors relative to the benchmark. Financials, Consumer Staples, and Industrials were the most underweight sectors relative to the benchmark at the end of the period. At inception, the top three overweight sectors were Energy, Telecommunication Services, and Information Technology. The most underweight sectors at inception were Consumer Staples, Consumer Discretionary, and Industrials. Given the First Trust ETF employs a currency hedging strategy to minimize the impact of changes in exchange rates versus the Canadian dollar, and considering that the portfolio remains consistent in its attempt to replicate the AlphaDEX European Dividend Index, we conclude there was no material change to the risk profile of the First Trust ETF during the period. Results of Operations The First Trust ETF s net asset value as of June 30, 2014 for Common Class units was $21.39 per unit and for the Advisor Class units was $21.39 per unit. The First Trust ETF s initial net asset value of Common Class units was $20.00 on February 4, 2014 and $20.00 for the Advisor Class units. 1

4 The First Trust ETF paid income distributions per unit as follows: First Trust ETF Payment Date Class Jan 8 th Feb 7 th Mar 7 th Apr 7 th May 7 th Jun 6 th Common Class EUR Advisor Class EUR.A Investment Performance The First Trust ETF Common Class units returned 11.63%, net of fees and expenses, from the date of inception to June 30, This compares with the benchmark s total return of 12.43%. The First Trust ETF underperformed the benchmark. An overweight position in Energy and positive stock selection in Financials boosted relative performance versus the benchmark during the period. Stock selection in Health Care stocks was also accretive to relative performance since inception. An overweight position coupled with stock selection resulted in underperformance in Information Technology stocks relative to the benchmark. Stock selection in Industrials stocks also weighed on relative performance. The top five stocks by contribution to return were Orange SA Sponsored ADR, Shire PLC Sponsored ADR, Statoil ASA Sponsored ADR, Eni SpA Sponsored ADR, Royal Dutch Shell Plc Sponsored ADR Class A. The bottom five stocks by contribution to return were Logitech International S.A., VimpelCom Ltd. Sponsored ADR, Royal Philips NV Sponsored ADR, Carnival plc Sponsored ADR, ARM Holdings plc Sponsored ADR. The First Trust ETF s currency hedge strategy was a benefit to the portfolio relative to an unhedged strategy as the Canadian dollar depreciated over the period against the currencies that are hedged in the portfolio. Recent Developments In June 2014, the First Trust ETF added 6 positions and removed 12 to reflect the changes that occurred in the underlying index during its semi-annual rebalance. The index changes were made by applying the quantitative AlphaDEX selection methodology to a universe of European market dividend paying stocks. Over the reporting period, European market equities continued a steady rise. The majority of the positive returns were observed in February. The search for yield in Europe has caused bond yields to fall as bond prices were bid up. International Financial Reporting Standards The financial statements of the First Trust ETF have been prepared in compliance with International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB). The First Trust ETF adopted this basis of accounting in 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the First Trust ETF prepared its financial statements in accordance with Canadian generally accepted accounting principles as defined in Part V of the CICA Handbook (Canadian GAAP). Related Party Transactions FT Portfolios Canada Co. is the Manager of the First Trust ETF and is a Canadian affiliate of First Trust Advisors L.P., the investment advisor (the Advisor ) of the Trust. Pursuant to terms of the declaration of trust of the First Trust ETF, the Manager provides or arranges for all management, administrative and other services required by the First Trust ETF. The Manager receives a management fee from the First Trust ETF. For further details, please see Management Fees. The Manager has retained the Advisor to provide certain services to the First Trust ETF pursuant to an investment advisory agreement. The Advisor receives advisory fees from the Manager out of the management fee. 2

5 Financial Highlights The following tables show selected key financial information about the First Trust ETF and are intended to help you understand the First Trust ETF s financial performance from date of inception to the period ended June 30, The date of inception of the First Trust ETF was February 4, This information is derived from the First Trust ETF s unaudited interim financial statements for the period ending June 30. The First Trust ETF s Net Assets per Unit June 30, 2014 EUR EUR.A Net assets, at the beginning of the period (1) $ $ Increase (decrease) from operations: Total revenue Total expenses (0.13) (0.23) Realized gains (losses) for the period Unrealized gains (losses) for the period Total increase (decrease) from operations (2) $ 1.62 $ 1.74 Distributions: From income (excluding dividends) (0.18) (0.09) From dividends - - From capital gains - - Return of capital - - Total Annual distributions (3) $ (0.18) $ (0.09) Net assets, at the end of the period (4) $ $ (1) This information is provided as at June 30 of the period shown. (2) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the period. (3) Distributions were either paid in cash or reinvested in additional units of the First Trust ETF. (4) This table is not intended to be a reconciliation of beginning to ending net assets per unit. Ratios and Supplemental Data June 30, 2014 EUR EUR.A Net asset value (000's) $ 27,167 $ 1,711 Number of units outstanding 1,270,000 80,000 Management expense ratio (1) 0.75% 1.86% Management expense ratio before waivers or absorption 0.75% 1.86% Trading expense ratio (2) 0.12% 0.12% Portfolio turnover rate (3) 49.09% 49.09% Net asset value per unit $ $ (1) Management expense ratio is based on total expenses for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (2) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (3) The First Trust ETF s portfolio turnover rate indicates how actively the First Trust ETF s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the First Trust ETF buying and selling all of the securities in its portfolio once in the course of the period. The higher a First Trust ETF s s portfolio turnover rate in a period, the greater the trading cost payable by the First Trust ETF in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessarily a relationship between high turnover rate and the performance of a First Trust ETF. 3

6 Management Fees The First Trust ETF will pay the Manager a management fee equal to up to 0.80% and, in respect of the EUR.A, an additional amount for a service fee (see EUR.A Service Fee below) based on the average daily NAV of the First Trust ETF. The management fee, plus applicable taxes including HST, will be accrued daily and paid quarterly in arrears. The Manager may, from time to time in its discretion, waive all or a portion of the management fee charged at any given time. EUR.A Service Fee The Manager pays registered dealers a service fee equal to 1.00% per annum of the NAV of the Units held by clients of the registered dealer, plus any applicable taxes. The service fee will be calculated and accrued daily and paid quarterly at the end of each calendar quarter. Past Performance General The past performance information shown assumes that all distributions made by the First Trust ETF in the periods shown were reinvested in additional securities of the First Trust ETF. The performance information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. How the First Trust ETF has performed in the past does not necessarily indicate how it will perform in the future. Year by Year Returns The bar chart below shows the First Trust ETF s performance for the period ended June 30, and illustrates how the investment fund s performance has changed from the inception date to the period ended June 30, The chart also shows, in percentage terms, how much an investment made on the first day of each financial year would have grown or decreased by the last day of each financial year % 12.00% First Trust AlphaDEX TM European Dividend Index ETF (CAD-Hedged) 11.63% 11.12% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% *Feb 4/14 to June 30/14 EUR 11.63% EUR.A 11.12% *Date of Inception 4

7 Summary of Investment Portfolio The table sets out the percentage (based on total net assets) of the First Trust ETF s top 25 holdings as at June 30, This summary of portfolio holdings may change due to ongoing portfolio transactions of the First Trust ETF. A quarterly update is available at Issuers % of ETF Total Net Assets Shire PLC, ADR 4.38% Eni SPA, ADR 4.36% Mobile TeleSystems OJSC, ADR 4.31% InterContinental Hotels Group PLC, ADR 4.21% Total SA, ADR 4.20% Smith & Nephew PLC, ADR 4.10% Statoil ASA, ADR 4.08% Orange, ADR 3.97% Vodafone Group PLC, ADR 3.85% Grifols SA, ADR 3.42% Royal Dutch Shell PLC, ADR, Class A 3.38% BP PLC, ADR 3.38% BHP Billiton PLC, ADR 3.36% Banco Santander General Hispano SA, ADR 3.29% Banco Bilbao Vizcaya Argentaria SA, ADR 3.20% Telefonaktiebolaget LM Ericsson, ADR, Class B 3.13% Tenaris SA, ADR 2.26% Teva Pharmaceutical Industries Ltd., ADR 2.23% Telefónica SA, ADR 2.21% Koninklijke Philips N.V. 2.17% VimpelCom Ltd., ADR 2.16% National Grid PLC, ADR 2.14% ArcelorMittal NY Registry Shares 2.12% Prudential PLC, ADR 2.12% STMicroelectronics N.V. 1.92% Portfolio Breakdown The table sets out the percentage (based on total net assets) of the First Trust ETF s portfolio as at June 30, Sector Weightings % of ETF Total Net Assets Energy 22.35% Healthcare 19.82% Telecommunication Services 17.21% Financials 10.89% Information Technology 8.08% Materials 7.19% Consumer Discretionary 7.10% Consumer Staples 3.28% Utilities 2.14% Industrials 1.52% Cash and Cash Equivalents 1.56% 5

8 The table sets out the percentage (based on total net assets) of the First Trust ETF s portfolio, by country, as at June 30, Country Weightings % of ETF Total Net Assets United Kingdom 31.11% Spain 12.12% The Netherlands 10.35% France 8.17% Switzerland 4.62% Ireland 4.38% Luxembourg 4.38% Italy 4.36% Russia 4.31% Norway 4.08% Sweden 3.13% Germany 2.35% Israel 2.23% Belgium 1.69% Jersey 0.82% Denmark 0.78% Finland 0.70% 6

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